Euro zone economy shows signs of recovery

An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8, 2013.

Reuters/Kai Pfaffenbach

LONDON (Reuters) - The euro zone's battered economy is probably recovering but the gulf between its two biggest members is widening, according to a survey on Tuesday that showed business optimism in the bloc at an eight-month high.

Markit's Eurozone Composite PMI, based on business activity across thousands of companies, and a good gauge of economic growth, rose in January to a 10-month high of 48.6 from 47.2 in December - an improvement on the preliminary reading of 48.2.

While still below the 50 mark that divides growth and contraction, where it has been since February last year, it has risen for the third straight month.

But the data showed a continued divergence between the euro zone's powerhouse economy Germany and that of neighboring France that will worry policymakers.

The German PMI chalked up its biggest one-month rise since August 2009, soaring to its highest since June 2011, while the reading for the bloc's second-biggest economy France plummeted to its lowest in nearly four years. The French services PMI was even below readings from perennial laggards Spain and Italy.

"That's a really worrying sign. It's going to cause more tensions between Germany and France ... on various aspects of euro zone management," said Jennifer McKeown, economist at consultancy Capital Economics.

"France will continue to call for more supportive policy, not just for the periphery but the euro zone as a whole. Germany is taking a much more hardline stance."

Related Coverage

The euro zone PMI for services firms rose to a 10-month high of 48.6 from 47.8, above a flash estimate of 48.3.

Across the channel in Britain, activity amongst the country's services firms, which account for more than three-quarters of gross domestic product, rose.

"The UK services PMI has bounced back into growth territory, dampening fears over an unprecedented triple-dip recession being called," said James Knightley at ING.

After only one quarter of expansion, Britain's economy contracted again at the end of last year. That put it on the brink of its third recession in four years.

Growth in the United States services business is expected have fallen slightly last month following relative weakness in the private services component of January's payrolls report. The data are due at 1500 GMT. European services PMIs: link.reuters.com/qer29s > Euro zone PMIs and GDP growth: link.reuters.com/rud84s > Global services activity: link.reuters.com/dyh85s

ON THE UP

The euro zone economy probably contracted 0.4 percent at the end of last year, notching up its third negative quarter, and is likely to stagnate in the current period, according to a Reuters poll published last month. <ECILT/EU>

The European Central Bank said after its January policy setting meeting, when it left interest rates on hold at 0.75 percent, that there were already signs of stabilization, but official data on Tuesday showed retail sales fell by the largest margin in eight months in December.

None of the 75 economists polled by Reuters last week see any shift when the ECB meets on Thursday, however, and median forecasts suggested no change in rates until July 2014 at least - the end of the forecast horizon. <ECB/INT>

Tuesday's PMI survey showed services firms in their euro zone were more optimistic about the future than at any point since last May.

The business expectations index leaped to 56.4 from 52.5, the biggest one-month rise since August 2009, just as the euro zone emerged from its previous recession.

"New business in the sector improved, and business expectations are also becoming increasingly optimistic. The employment component showed a less encouraging development though," said Evelyn Herrmann at BNP Paribas.

Firms reduced their workforces again last month and at the fastest pace in over three years, with the composite employment index falling to 46.1 from December's 47.3.

Unemployment hit a record 11.7 percent of the working population in December, but inflation fell to a two-year low of 2 percent in January.

Euro zone factories had their best month in nearly a year during January as burgeoning German output offered support, data released last week showed. <EUR/PMIM>